Tuesday, August 23, 2016

Bonddad's Tuesday Linkfest

The euro area economy continued to expand at a steady pace in August. At 53.3, up from 53.2 in July, the flash estimate of the Markit Eurozone PMI® inched up to a seven-month high. With the index only slightly above the average seen throughout the year to date, growth in the third quarter is likely to be similar to that seen in the first half of the year

The Fed's dual mandate aims for maximum sustainable employment and an inflation rate of 2 percent, as measured by the price index for personal consumption expenditures (PCE). Employment has increased impressively over the past six years since its low point in early 2010, and the unemployment rate has hovered near 5 percent since August of last year, close to most estimates of the full-employment rate of unemployment. The economy has done less well in reaching the 2 percent inflation rate. Although total PCE inflation was less than 1 percent over the 12 months ending in June, core PCE inflation, at 1.6 percent, is within hailing distance of 2 percent--and the core consumer price index inflation rate is currently above 2 percent.1

So we are close to our targets. Not only that, the behavior of employment has been remarkably resilient. During the past two years we have been concerned at various stages by the possible negative effects on the U.S. economy of the Greek debt crisis, by the 20 percent appreciation of the trade-weighted dollar, by the Chinese growth slowdown and accompanying exchange rate uncertainties, by the financial market turbulence during the first six weeks of this year, by the dismaying pothole in job growth this May, and by Brexit--among other shocks. Yet, even amid these shocks, the labor market continued to improve: Employment has continued to increase, and the unemployment rate is currently close to most estimates of the natural rate.

The measure has risen from humble beginnings during the Great Depression to be an essential gauge for governments and central banks the world over. Long-term investors allocate capital based on its findings; traders buy and sell stocks, bonds, currencies and commodities in the blink of an eye after readings flash on their screens. One such closely-watched report comes this Friday, when the U.S. releases its revised estimate of second-quarter GDP.

Problem is -- whether compiled by production, income or expenditure approaches -- GDP is increasingly struggling to keep up with the pace of economic change.

In an age where $10 can buy one compact disc or a month of unlimited music streaming, it’s getting tougher to put a price on economic output. And as an aggregate measure that ignores distribution effects, GDP has masked rising inequalities that helped fuel anti-establishment politicians like Donald Trump or the backlash that contributed to Brexit.

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